Are Harvard Business School Students Taught Anything of Real World Value?

John Tamny
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Along the lines of the above, the authors write that “When IBM gains market share at the expense of Hewlett-Packard in the server market, there is no silver lining for HP; it has lost.” Wrong again. HP may have lost in the very near term, but failure is the second best thing to success for freeing up limited resources that can be redirected toward something actually desired by the marketplace. Individuals and businesses can only do so much, and that’s what’s so great about the visible hand responding to the invisible hand. Work in a free world guided by market signals is divided up. Steve Wozniak was a programming genius, but didn’t have a clue about how to market his abilities. Steve Jobs didn’t know much about programming, but he was a visionary when it came to anticipating what consumers wanted. Alone they were both “losers” in a limited sense, but together they founded Apple Computer. HP conceding one market to IBM isn’t HP losing as much as it’s HP migrating toward a more lucrative and more winning market.

Moving to wages, the authors write that “The typical U.S. worker today is facing far greater competition for his or her services, and this competition is exerting predictable downward pressure on wages.” It would be hard to find a sentence more pregnant with falsehoods; the sentence part of a paragraph full of wrongheaded thinking. For one, investment, not supply of workers, is the driver of wages. The arrival of Bill Gates and Paul Allen to Seattle did not drive down wages thanks to the arrival of two new workers; rather the return of these two geniuses along with their nascent company was a magnet for investment that turned a dying city into a capital attracting brain hub. Productivity drives wages up regardless of the supply of labor, while stagnation drives wages down even if the supply of labor is microscopic.

Preceding the above-quoted sentence is this gem of absurdity about how it’s easy to “understand the root causes of the well-documented stagnation in average real wages in the United States since 1980.” They of course tie it to supply of labor, which is ridiculous, but what of this “well-documented” stagnation? If measured in living standards, it’s apparent that wages have skyrocketed since 1980. After that, it seems the authors are looking at average statistics over individuals. Can most readers who’ve been working since 1980 claim wage stagnation? Probably not. More realistically, most can claim higher wages since then; averages constantly dragged down by new entrants to the labor force. The authors are now professors at the world’s most prominent business school, but in 1980 they were probably not. Stagnation? No.

Much later in the book they argue that “Many companies” have essentially succumbed to the lure of low wages around the world; thus the purpose of their book: they decry the movement of factories to low wage locales. But even here they engage in fallacy of the first order. Indeed, lost on the authors is that low wage workers are very expensive. If this is doubted, look at Boston, San Francisco and New York in the United States. Though all three are high wage locales, they also attract the lion’s share of venture investment. In short, it’s fun for Lou Dobbs and tenured professors to talk about the hollowing out of high wage countries, but the greater truth is that the exact opposite is occurring.

At one point the authors write that “The United States suffered a significant productivity slowdown from the early 1970s to about the mid-1990s, a period generally associated with weak economic performance.” Really? By whom? Though it’s true that the 1970s were marked by stagnation rooted in high taxation and dollar devaluation (the authors would seemingly have liked the devaluation for it helping our “trade deficit” – not true, but they believe this stuff), the ‘80s for those who lived them were seen as a decade of economic revival; the ‘90s a continuation of that revival. No doubt the authors could point to government statistics “proving” that the ‘80s were slow growth, but that just speaks to the near worthlessness of government statistics.

As mentioned, a frequent theme within a broader one of bringing manufacturing back to these shores is the “industrial commons.” They can’t quite articulate what this is, but it seems to be any industry’s “ecosystem.” Considering the U.S. automakers, if GM had been allowed to fail, the authors argue that an ecosystem of suppliers and designers similarly relied on by Ford would have been compromised. That’s one of way of looking at it, but if GM had been allowed to go under its brands wouldn’t have disappeared; instead they would have been purchased by carmakers possessing a clue about how to earn profits like Toyota, Honda, Nissan and Volkswagen. In short, the automobile “industrial commons” in the U.S. would have been strengthened by the very free markets that these professors are reluctant to fully embrace.

Indeed, their point seems to be that absent government, there would be no industrial commons. Basically governments must spur the creation. The latter illogic in mind, thank goodness government wasn’t terribly involved in transportation 100 years ago. If so, they would have bailed out horse and buggy manufacturers and horse breeders at the expense of Ford and GM. The authors cite the railroads as evidence of economy-enhancing cooperation between government and entrepreneurs, but as Burton Folsom and others have pointed out, the tight relationship between “political entrepreneurs” and government worked to the detriment of the rise of the railroad.

Considering the decline of the semiconductor manufacturing industry in the U.S., they blame governments for not subsidizing the industry enough, but not explained by the authors is why we’d want to maintain industries that can’t make it on their own. How does this boost economic growth?

They might respond that the above is true, that governments must seek to boost high end economic activity, but not explained is what that is. Of course they can’t explain it because today’s innovator is often tomorrow’s laggard. Lest we forget that in concert with Apple Computer’s rise in the ‘80s, so were Tandy, Commodore and other computer makers prominent in the sector. Tandy and Commodore have long since disappeared, Apple nearly went bankrupt in the late ‘90s, so for the authors to smugly suggest that we shouldn’t pursue industrial policy as much as governments should boost high value industries brings new meaning to “fatal conceit.”

Sadly for the authors, their whole book screams fatal conceit. On page after page the reader must suffer baseless presumptions about how things should be done; those presumptions very thinly supported. Americans are skeptical when governments support the private sector, but the authors point to China and its “863” program meant to “free China from dependence on foreign technology.” They claim without evidence that this worked, but simple logic says it didn’t. Indeed, the beauty of free trade is that technology is shared, that walls that retard the meshing of ideas are taken down rather than erected. If we want the U.S. that we know to decline, let’s develop government programs meant to “free the U.S. from dependence on foreign technology.” This kind of thinking is as silly and backwards as the right wing thinking that decries our import of “foreign oil.”

The authors lament what they deem a lack of government support of science research, but why? If we assume what’s not true, that a lack of support will lead to an advancement decline stateside, the fact remains that whether its discovered in Shanghai or Spokane, good ideas are usually enjoyed by the world. Google may be headquartered in Silicon Valley, as is eBay, but both companies are a source of efficiency enhancement for the world.

Ultimately they conclude that while “it is both business’s and government’s responsibility to rebuild the American industrial commons”, and that it’s in the long-term interests of business to do so, too often business leaders solely cater to the “short-term interest of a particular set of shareholders.” Really? If so, why then does energy exploration attract so much investment in the U.S., not to mention pharmaceuticals despite the long lag time between drug development and the bringing of the drug to the market? As the authors themselves acknowledge, profits in biotechnology are a very distant object, yet the companies in this space don’t lack for investment. That the actions of U.S. companies are driven by worship of quarterly earnings is a popular, but wholly false notion.

And while they decry “industrial policy”, they say we need a “national economic strategy for manufacturing.” Hmmmm. We don’t have a national computer strategy, a national shoe strategy, or a national breakfast cereal strategy, yet we receive all three in abundance. Despite that, and despite the low batting average of governments when it comes to producing abundance, we need the “angels” that populate it to define a strategy for manufacturing? This would be funny if the authors weren’t deadly serious.

Even more embarrassing for the authors is their defense of manufacturing subsidies. They argue that the agriculture and mortgage industries in the U.S. are subsidized by politicians, so why not manufacturing? Did anyone edit the authors? Didn’t their HBS peers want to save them from themselves? Simply put, agriculture is an embarrassment today precisely because the whole sector is reliant on handouts from others to exist. As for mortgages, can anyone with a straight face say that if the political class had a do over, that it would once again corrupt the mortgage industry in the way that it already has been; the end result a financial crisis caused by the bailing out of these heavily regulated, heavily subsidized sectors?

Put plainly, if you love manufacturing, you should hope that politicians stay far, far away. The problem is they haven’t. Indeed, a major factor in President Nixon’s wrongheaded decision to delink the dollar from gold in 1971 was a rooted in a desire to aid U.S. manufacturers. Since then this shrinking sector of the economy has been “boosted” by the Plaza Accord, not to mention all manner of tariffs on foreign goods from all U.S. presidents. Let it be clear that tariffs and the weak dollar ultimately hurt U.S. manufacturers, but to suggest as the authors do, that the U.S. political class has ignored manufacturing speaks to willful blindness on their part. In truth, politicians have heavily subsidized manufacturing, and while its relevance was set to decline under any reasonable scenario, the handouts offered by politicians have surely made its long-term death spiral more gruesome.

So, should we try to bring manufacturing back to the U.S.? Oddly the authors answer the question with an ironic quote that they attribute to manufacturers on page 61 of their book. The answer according to venture capitalists is “No way, [manufacturing] should be outsourced to China, Mexico, India, or some other low-cost place.” The authors didn’t mean to, but they explained why manufacturing isn’t coming back to the U.S. It isn’t because it makes no economic sense to, and because it makes no economic sense to bring it back, investors whose funds drive economic activity won’t pay to bring it back. Good riddance.

Back to George Leef, his high-powered attorney friend told him he would just as readily take 30 individuals admitted to Harvard Law, but who did not attend, as he would graduates. His rationale to Leaf was that in one of the world’s foremost law schools students aren’t taught much that translates to the real world of lawyering. The answer is to simply get smart people, and if you’re accepted to Harvard Law, you’re smart.

To read Pisano and Shih’s highly fallacious book is to conclude the same about Harvard’s graduate business school, and business schools more broadly. Figure Pisano and Shih are at the top of their field, yet they’ve written a book that no serious businessperson could take seriously; one full of ideas that would cause new entrants to the working world to be laughed out of the interview room if they were to offer them up to HR people visiting HBS.

Of course, what’s said above is not the point. Companies that recruit at Harvard and other top business schools aren’t looking for knowledge; rather they’re looking for smart, hardworking individuals. HBS has the latter in abundance, and as memories are increasingly short, they’ll soon enough forget all that they “learned” while in attendance. Since HBS graduates are our business future to some degree, we should cheer their short memories.